Treasury Investors Bearish Ahead of Fed Meeting, Survey Shows
Jan. 26 (Bloomberg) -- Treasuries may fall for a second week on speculation the Federal Reserve this week will amend its pledge to keep rates low for a ``considerable period.''
Ried, Thunberg & Co.'s weekly index of investor sentiment toward the 10-year Treasury note was 43 on Friday, compared with 40 a week earlier, the lowest since 1990. A reading below 50 reflects expectations the note's price will fall by the end of March. The 54 investors surveyed by the Westport, Connecticut- based research firm manage a combined $1.6 trillion.
Some 54 percent of those surveyed said the Fed, which meets on Tuesday and Wednesday, will either drop ``considerable period'' or replace it with a similar phrase. The statement has helped underpin Treasuries since it was introduced in July, keeping yields low even after an index of manufacturing rose in December to the highest in two decades and a report showed consumers this month are the most upbeat in three years.
``Rates probably will have to move higher,'' said Timothy Wilhide, a fund manager at Hartford Investment Management Co., with about $98 billion in fixed-income securities. Economic reports point ``to much higher rates.''
The 4 1/4 percent note maturing in November 2013 fell almost 3/8 last week, or $3.75 per $1,000 face amount, to 101 13/32. The yield rose 4 basis points, or 0.04 percentage point, to 4.07 percent. The note dropped 31/32 Friday. Wilhide, who didn't participate in the survey, said his portfolios are in line with the Lehman Brothers Aggregate Index.
The investors disagree with economists at the 21 of the 23 firms that trade with the New York Fed, known as primary U.S. government securities primary dealers, surveyed last week by Bloomberg News. The economists said the central bank will retain the phrase after the economy only added 1,000 jobs in December.
`Tick Back Up'
``Eventually rates are going to start to tick back up,'' said Don Alexander, a debt strategist in New York at Citigroup Private Bank, which handles about $166 billion in assets. ``We need to see the job creation.'' Alexander didn't participate in the survey.
This week, National Association of Purchasing Management- Chicago is expected to say a measure of manufacturing in the area for January held near a nine-year high, according to the median forecast of 43 economists surveyed by Bloomberg News. The University of Michigan's report will likely show consumer confidence held near a three-year high this month, a separate Bloomberg survey shows.
`Prepare the Markets'
Fed policy makers may opt to alter their statement to reflect prospects for quicker economic growth, said Bulent Baygun, New York-based head of U.S. fixed income strategy at Barclays Capital Inc., a primary dealer.
``That would help prepare the markets for an eventual'' dropping of the phrase ``the committee believes that policy accommodation can be maintained for a considerable period'' later this quarter, he said.
The yield on the two-year Treasury note, considered the most sensitive to monetary policy, will rise to between 2.25 percent and 2.40 percent by April if the Fed drops the phrase, Baygun said. The 1 7/8 percent note due in December 2005 closed yielding 1.66 percent on Friday.
The economy will expand 4.6 percent in 2004, the fastest pace since 1984, according to the average estimate of 54 economists surveyed this month by Blue Chip Economic Indicators. The central bank this week will leave its target for overnight loans between banks, or federal funds, at 1 percent, according to 80 economists surveyed by Bloomberg News and all the investors surveyed by Ried, Thunberg.
Ten-year yields have fallen from a high of 4.41 percent earlier this month, after a government report on Jan. 9 showed the economy in December added a fraction of the median economist forecast for 150,000 jobs. Eighty percent of Ried, Thunberg survey participants cited evidence of a stronger labor market as the most likely trigger of a Treasury market sell off.
`Fundamental Basis'
Treasury yields have also been kept low as an acceleration in inflation hasn't accompanied the economic expansion and amid purchases of U.S. debt by foreign central banks, investors said. Consumer prices, excluding food and energy for 2003, rose the least in 43 years, a government report this month showed. The Fed's holdings of Treasuries for foreign central banks rose $19.3 billion to a record $885 billion in the week ended Wednesday, the biggest jump since May.
Purchases of Treasuries by foreign central banks have had ``the effect of driving interest rates below levels that can be justified on a fundamental basis in the U.S.,'' Kenneth Hackel, Merrill Lynch & Co.'s chief U.S. fixed income strategist, wrote in a report Friday. New York-based Merrill Lynch is a primary dealer.
The Bottom
The 10-year note's yield has averaged 3.8 percentage points more than the growth in gross domestic product the past 20 years, according to Bloomberg data. Merrill Lynch has forecast the yield will rise to about 6 percent by year-end as the global economic recovery gathers pace.
Investors appear to be hesitant to push the 10-year note's yield below 3.92 percent, the lowest since the start of October. Twice in the past two weeks the yield touched that level before rebounding.
The level is ``a pretty good resistance point,'' said Hartford Investment's Wilhide.
Treasuries made up an average of 25 percent of portfolios of the investors surveyed by Ried, Thunberg, up from 22 percent a week earlier. The amount is down from a high of 36, reached in February 2003. The money managers cut corporate bonds to 30 percent from 31 percent, and left mortgage-backed securities and debt of government agencies such as Fannie Mae at 37 percent.
More Supply
The Treasury department's announcement Friday that it is considering selling 20-year inflation-linked debt added to concern a swelling government budget deficit will require more debt sales. The Congressional Budget Office on Monday will give its estimate for this year's shortfall, currently forecast by the government to be $480 billion.
The deficit will be ``the primary driver to higher rates by the end of the year,'' said Anton Pil, global head of fixed income at J.P. Morgan Private Bank in New York, with $280 billion in assets. Ten-year yields will be ``closer to 5 percent'' within about a year, said Pil, who didn't participate in Ried Thunberg's survey.
Analysts at firms including Merrill Lynch estimate the budget gap will exceed $500 billion in the year ending Sept. 30. Treasury announces today how much in two-year debt it will sell on Thursday. The government may auction $27 billion, according to forecasts from Barclays Capital Inc. and Wrightson ICAP LLC.
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